Kohaliku omavalitsuse üksuse finantsjuhtimise seadus (KOFS)

§ 1. Scope of application

Local Government Financial Management Act provides the principles of preparation, adoption, implementation and reporting of local government budgets, measures for ensuring financial discipline of local government financial management units, principles of the procedure for application of measures for ensuring financial discipline and principles of the procedure for eliminating the risk of a difficult financial situation.

§ 2. Definitions

In this Act, the following definitions are used:

1) budget – a plan of operating revenue, operating expenditure, investment activities, financing activities and changes in liquid assets for a budgetary year together with additional requirements, authorities and information which are the basis for financing the activities of a local government during the corresponding year;

3) activities – functions of a local government for the fulfilment of which objectives and indicators showing their fulfilment may be established;

4) objective of activities – a particular measurable purpose expressing the expected impact or results established for a budgetary year on the basis of an analysis of the situation and the development plan;

5) income – operating revenue pursuant to § 14 of this Act, revenue from sale of tangible and intangible fixed assets (hereinafter fixed assets) and holdings or other shares, targeted financing received for acquisition of fixed assets, financial income and received payments for loans;

6) expenses – operating expenditure pursuant to § 15 of this Act, acquisition of fixed assets, holdings or other shares, targeted financing granted for acquisition of fixed assets, financial expenses and granting of loans, and performance of the obligations specified in clause 2 of subsection 1 of § 17;

7) investment – acquisition of fixed assets and value added tax expenses related thereto in connection with the construction or renovation of facilities or acquisition of assets;

8) local government financial management unit – a local government and a unit dependent thereon;

9) dependent unit – a unit which is under direct or indirect dominant influence of a local government within the meaning of the Accounting Act which has received more than half of its income from a local government, the state, another legal persons in public law or units under the dominant influence of the aforementioned persons or support and rental income from local governments and units under the dominant influence thereof more than 10 per cent of the operating revenue of a corresponding year.

§ 3. Application of Accounting Act

In this Act, definitions are used within the meaning of the Accounting Act, taking into account the specifications of this Act.

§ 4. Budgetary year

(1) The budgetary year of a local government begins on 1 January and ends on 31 December.

(2) The budget of a local government (hereinafter budget) shall be approved for one budgetary year. The budget may include information concerning a longer period than the budgetary year.

§ 4¹. Budget of current year

The budget of current year means:

1) the budget adopted by the council pursuant to subsection 2 of § 23 of this Act and the supplementary budget pursuant to subsection 3 of § 26;

2) planning of expenses pursuant to clause 4 of subsection 4 of § 26 of this Act and using the reserve pursuant to subsection 7 of § 5.

§ 5. Budget structure and classification

(2) The budget consists of the following sections:

1) operating revenue;

2) operating expenditure;

3) investment activities;

4) financing activities;

5) changes in liquid assets.

(2¹) Changes in receivables and liabilities may be planned as a separate section of the budget if they have a significant impact on the budget.

(3) The detail of classification of the budget sections specified in subsection 2 of this section must at least comply with the provisions of §§ 14–18 of this Act.

(4) Sections, annexes and additional information not specified in subsection 2 of this section may be added to the budget including transactions between administrative agencies and agencies under the governance of administrative agencies and between activities and objectives necessary for specifying the financial situation and supplementing the budget of a local government but which are not taken into account in the budget sections specified in subsection 2.

(5) The budget may additionally be classified by activities and the activities additionally by objectives in the budget sections specified in subsection 2 of this section. Indicators shall be added to the objectives in order to measure their fulfilment. An indicator is a quantitative or qualitative measure expressing the fulfilment of the objective which allows to analyse movement towards the fulfilment of the objective.

(6) A council may authorise a rural municipality or city government to classify the budget in more detail.

(7) A reserve for incidental expenses may be separately planned in the budget as operating expenditure. A rural municipality or city government shall allocate funds from the reserve for specific purposes. A rural municipality or city government shall establish the conditions and procedure for using the funds of the reserve.

§ 13. Planning of transactions in budget

Transactions are planned in the budget according to when they occur regardless of when cash is received or paid for the transactions.

§ 14. Budget section of operating revenue

(1) In the budget section of operating revenue, revenue shall be classified according to economic content at least as follows:

1) tax revenue;

2) revenue from sale of goods and services;

3) received support;

4) other operating revenue.

(2) The following are not planned in the budget section of operating revenue:

1) profit and loss from sale of fixed assets;

2) targeted financing received for acquisition of fixed assets;

3) financial income.

(3) Changes in the claims and obligations related to revenue may be planned in the budget section of operating revenue and taken into account in the total amount thereof if such changes are forecasted to have a significant impact on the changes in the balance of cash and bank accounts recorded in the budget section of changes in liquid assets.

§ 15. Budget section of operating expenditure

(1) In the budget section of operating expenditure, expenditure shall be classified according to economic content at least as follows:

1) granted support;

2) other operating expenses.

(2) The following are not planned in the budget section of operating expenditure:

1) depreciation and revaluation of fixed assets;

2) targeted financing granted for acquisition of fixed assets;

3) financial expenses;

4) value added tax expenses related to acquisition of fixed assets.

(4) Value added tax expenses related to business transactions are recorded together with the cost of goods and services.

§ 16. Budget section of investment activities

(1) The budget section of investment activities shall be classified according to economic content at least as follows:

1) acquisition of fixed assets;

2) sale of fixed assets;

3) targeted financing received for acquisition of fixed assets;

4) targeted financing granted for acquisition of fixed assets;

5) acquisition of holdings;

6) sale of holdings;

7) acquisition of other shares;

8) sale of other shares;

9) granted loans;

10) received payments for loans;

11) financial income and financial expenses.

(2) The following shall not be planned in the budget section of investment activities:

1) non-monetary targeted financing received for acquisition of fixed assets and fixed assets received in connection with such financing, provided that it does not involve sale of goods and services by the supplier;

2) non-monetary targeted financing granted for acquisition of fixed assets and non-monetary transfer of fixed assets in connection with such financing;

3) non-monetary contributions to equities of companies, foundations and non-profit associations and non-monetary payments from equities of companies, foundations and non-profit associations;

4) profit and loss arising from revaluation of financial investments and holdings, and a local government's share of the outcome of a financial year of a company with the participation of the local government.

(3) The sales specified in clauses 2, 6 and 8 of subsection 1 of this section are planned as sales revenue, not as profit or loss from sale.

(4) Investments shall be planned in the budget section of investment activities as acquisition of fixed assets together with value added tax expenses related to the acquisition.

(5) In order to calculate the total sum of the budget section of investment activities, the sales revenue specified in clauses 2, 6 and 8 of subsection 1 of this section, received targeted financing specified in clause 3, received payments for loans specified in clause 10 and the difference between the financial income and financial expenses specified in clause 11 are added up from which the acquisition cost specified in clauses 1, 5 and 7, granted targeted financing specified and in clause 4 and granted loans specified in clause 9 are deducted.

§ 17. Budget section of financing activities

(1) The budget section of financing activities shall be classified at least as follows:

1) taking of loans, issuing of bonds, assumption of finance lease and factoring obligations and assumption of obligations on the basis of service concession agreements;

2) repayment of loans taken, performance of finance lease and factoring obligations, redemption of bonds issued and repayments on the basis of service concession agreements.

(2) In order to calculate the total sum of the budget section of financing activities, funds planned for the assumption of obligations specified in clause 1 of subsection 1 of this section are added up from which funds planned for the performance of the obligations specified in clause 2 are deducted.

§ 18. Budget section of changes in liquid assets

(1) The budget section of changes in liquid assets shall be classified as follows:

1) changes in the balance of cash and bank accounts;

2) changes in the balance of shares of money market and interest funds;

3) changes in the balance of acquired bonds.

(2) Assets which comply with subsection 1 of § 36 of this Act are deemed to be liquid assets.

(3) Items specified in subsection 1 of this section may be planned as changes in liquid assets under one item.

(4) Increase and decrease in the balance of liquid assets shall be recorded in the budget section of changes in liquid assets correspondingly with a plus or minus.

§ 19. Balance, surplus and deficit of budget

(1) For the purposes of this Act, budget outcome means the difference between the total amount of the budget section of operating revenue and the total amount of the budget section of operating expenditure to which the total amount of the budget section of investment activities has been added. Budget outcome must equal to the changes in the budget section of financing activities, liquid assets and balance of receivables and liabilities.

(2) Budget is balanced if budget outcome is equal to zero.

(3) Budget is in surplus if budget outcome is positive.

(4) Budget is in deficit if budget outcome is negative.

§ 20. Preparation of budget strategy

(1) Budget strategy shall be prepared for the achievement of the objectives provided for in the development plan in order to plan the financing of intended activities. Budget strategy shall be prepared, processed, adopted and published in accordance with the provisions of § 37²of the Local Government Organisation Act.

(3) The following shall be presented in the budget strategy:

1) an analysis of the economic situation of a local government and forecast for the period of the budget strategy;

2) actual operating revenue of the year preceding the adoption of the budget strategy, the estimated operating revenue of the current year and the forecasted for the period of the budget strategy, classified at least as specified in subsection 1 of § 14 of this Act, estimated operating expenditure classified at least as specified in subsection 1 of § 15, the most significant activities and investments of the budget section of investment activities together with the forecasted total value and potential sources of financing, the estimated volume of financing activities and changes in liquid assets;

2¹) information concerning the planned amendments to local taxes and land tax for the budget strategy period;

3) an overview of the economic situation of a local government and the units dependent thereon, including figures necessary for calculating the operating result and net debt rate;

4) the operating result of a local government and local government financial management unit during the previous year, operating result forecasted for the current year and for every year of the budget strategy period as at the end of every year pursuant to § 33 of this Act;

5) actual net debt of a local government and local government financial management unit during the previous year, net debt forecasted for the current year and for the budget strategy period as at the end of every year pursuant to § 34 of this Act;

6) other information which is important in terms of organising the financial management of a local government.

(3¹) A unit dependent on a local government shall submit the information necessary for the preparation of the budget strategy to the rural municipality or city government within the terms and pursuant to the procedure prescribed in the regulation established on the basis of subsection 1 of § 37² of the Local Government Organisation Act.

(4) Operating revenue, operating expenditure and investments may additionally be planned by activities in the budget strategy.

(5) A list of additional activities may be set out in the budget strategy which shall be financed if the planned revenue is exceeded.

(6) A lower value of the operating result of a local government and local government financial management unit than the permitted value may be planned in the budget strategy:

1) for two non-consecutive years;

2) for the following budgetary year if the operating result of the budget of the current year is planned pursuant to subsection 2 of § 33 of this Act.

(8) When the draft budget strategy is being processed by the council, the initiator of the proposal for an amendment of the draft appends justification and calculations to the proposal which demonstrate the expenses arising from the planned amendments and the sources for covering such expenses. Upon assessment of a proposal made by the council for an amendment of the draft, the opinion of the rural municipality or city government is heard.

§ 21. Bases for preparation, adoption and implementation of budget

(1) A rural municipality or city council shall establish by a regulation the conditions of and procedure for:

1) classification of budgets;

2) preparation of draft budgets or draft supplementary budgets, processing and adoption thereof by the council;

3) processing and approval of annual reports by the council;

4) incurring of expenses if a budget has not been adopted;

5) implementation of budgets.

(2) The council may authorise a rural municipality or city government to establish by a regulation the procedure for the preparation of draft budgets or draft supplementary budgets and implementation of budgets.

§ 22. Preparation of draft budget

(1) A rural municipality or city government shall prepare a draft budget pursuant to the provisions of §§ 5 and 21 of this Act. An explanatory note shall be appended to the draft budget.

(2) At least the following information shall be presented in the explanatory note:

1) explanations and justification regarding the previous, current and coming budgetary year according to the classification specified in subsection 3 of § 5 of this Act.

1¹) explanations regarding the significant differences between the information in the draft budget and budget strategy;

2) an overview of the plan to fulfil the objectives indicated in the development plan and other development documents for the coming budgetary year and the activities planned for their fulfilment;

3) an overview of the investments planned for the coming budgetary year together with the cost and sources of financing;

3¹) the expected value of operating result and net debt of the local government and local government financial management unit by the end of the coming budgetary year;

4) an overview of activities or measures planned for the coming budgetary year in the budget strategy during the procedure for application of measures for ensuring financial discipline or in the recovery plan during the procedure for eliminating the risk of a difficult financial situation;

5) other relevant information concerning the coming budgetary year.

(2¹) If a rural municipality district or city district has been formed in a rural municipality or city, the draft budget is submitted together with the explanatory note to the rural municipality or city district assembly for obtaining its opinion. The requesting and reviewing of an opinion are carried out pursuant to the procedure and within the terms provided on the basis of subsection 1 or 2 of § 21 of this Act.

(3) A rural municipality or city government shall submit the draft budget and explanatory note to the council not later than one month before the beginning of the coming budgetary year.

(4) The draft budget and explanatory note are published on the website of the local government after their submission to the council. The explanatory note must be available on the website until the end of the budgetary year.

§ 23. Adoption of budget

(1) The initiator of a proposal for amending the draft budget shall append justification and calculations to the proposal which demonstrate the expenses arising from the planned amendments and the sources for covering such expenses. Upon assessment of a proposal made by the council, the opinion of the rural municipality or city government shall be heard.

(2) The council shall adopt the budget by a regulation.

(3) The budget is published on the website of the local government after adoption of the budget. The minutes of council sessions and meetings of council committees concerning the budgetary procedure are also published on the website.

(4) The budget shall enter into force as of the beginning of the budgetary year.

§ 24. Budget not adopted by beginning of budgetary year

(1) If a rural municipality or city council has not adopted a budget by the beginning of the budgetary year, the rural municipality or city government may incur expenses planned in the draft budget until the budget is adopted if the term for incurring such expenses arrives before the budget is adopted and if such expenses arise from:

1) legislation;

2) a contract entered into for the performance of the obligations specified in clauses 1–3, 5–5² and 7 of subsection 2 of § 34 and subsection 7 of § 34 of this Act;

3) subsection 2 of § 27 of this Act;

4) a court judgment.

(2) If a rural municipality or city council has not adopted a budget by the beginning of the budgetary year, the rural municipality or city government may, until a budget is adopted, incur the expenses not specified in subsection 1 of this section according to the classification determined by the rural municipality or city council in an amount of up to one twelfth of:

1) the expenses prescribed by the final budget of the previous year if the expenses are planned in the draft budget of the new budgetary year at least in the same amount, or

2) the expenses planned in the draft budget of the new budgetary year if the amount of expenses is smaller than the amount of expenses prescribed by the final budget of the previous year.

§ 26. Supplementary budget

(1) A budget may be amended by a supplementary budget during the budgetary year. A rural municipality or city government shall prepare a draft supplementary budget and submit it to the council. An explanatory note with justification regarding the need for the supplementary budget shall be appended to the draft supplementary budget.

(2) The draft supplementary budget and the explanatory note shall be published in the manner and at the time provided by subsection 4 of § 22 of this Act.

(3) The council shall adopt the supplementary budget by a regulation. The supplementary budget shall be processed by the council and the adopted supplementary budget shall be published pursuant to subsections 1 and 3 of § 23 of this Act.

(4) A supplementary budget need not be prepared if:

1) revenue increases and expenditure is not increased;

2) expenditure decreases;

4) revenue increases by funds allocated for specific purposes or by donations and expenditure increases by expenses incurred from such funds or donations;

5) a circumstance specified in subsection 5 of § 28 of this Act exists.

(5) If a supplementary budget is prepared during a budgetary year, the funds for specific purposes or donations and expenses incurred from such funds or donations specified in clause 4 of subsection 4 of this section shall be planned in the supplementary budget.

(6) A rural municipality or city government may incur expenses planned in the draft supplementary budget from the submission of the draft supplementary budget to the council until adoption of the supplementary budget if the term for incurring such expenses arrives before the supplementary budget is adopted and if such expenses arise from:

1) legislation;

2) a contract entered into for the performance of the obligations specified in clauses 1–3, 5–5² and 7 of subsection 2 of § 34 and subsection 7 of § 34 of this Act;

4) a court judgment.

(6¹) A rural municipality or city government may incur the expenses specified in subsection 2 of § 27 of this Act before the supplementary budget is adopted.

(7) The council shall adopt the amendments arising from a recovery plan by the supplementary budget within one month from the approval of the plan. If the budget of a local government has not yet been adopted, the amendments shall be recorded in the draft budget of the local government.

§ 27. Planning of unincurred expenses in following budgetary year

(1) Expenses prescribed in the budget of the previous year which remained unincurred shall be planned in the current budgetary year either by the budget, if the budget has not been adopted by the beginning of the year, or by the supplementary budget.

(2) Unincurred expenses of the previous budgetary year may be planned in the budget or supplementary budget in budget sections as the total amount if such expenses arise from:

1) a contract entered into for the implementation of investments or announced public procurement;

2) targeted financing granted for acquisition of fixed assets on the basis of a contract entered into;

3) targeted financing received on the basis of the contract entered into.

(3) In the case of planning the expenses specified in subsection 2 of this section as total amounts, a rural municipality or city government shall establish a more detailed division of the expenses. Expenses carried forward may be used for the purpose prescribed in the budget of the previous year.

§ 28. Implementation of budget

(1) A rural municipality or city government shall organise the implementation of budget and accounting. Implementation of the budget is the collection of revenue, incurring of expenses and transactions with assets and obligations, as well as keeping an account thereof pursuant to the accounting principles used in the preparation of the budget.

(2) Rural municipality and city governments, local government agencies or agencies under the governance of administrative agencies may conclude transactions only within the limits of the amount of expenses prescribed in the budget, except in the cases specified in § 24, clause 4 of subsection 4 of § 26 and subsections 6 and 6¹ of § 26 of this Act.

(3) If the expense is included in the budget strategy, rural municipality and city governments, local government agencies or agencies under the governance of administrative agencies may enter into contracts which involve expenses during the coming budgetary years, except for assuming the obligations specified in clauses 1–3, 7 and 8 of subsection 2 and in subsection 7 of § 34 of this Act.

(3¹) A rural municipality or city council may permit the rural municipality or city government to place a temporary restriction on the incurring of expenses prescribed in the budget by a regulation specified in subsection 1 of § 21 of this Act in the event of lower receipts of revenue than planned in the course of implementing the budget. The regulation shall provide the conditions, extent and duration of the restriction. The rural municipality or city government shall inform the rural municipality or city council of the restriction on expenses.

(3²) If the contract entails expenses during the coming budgetary years and this has not been taken into account in the budget strategy, the council may:

1) decide on the expenses on a case-by-case basis;

2) provide, in a regulation established on the basis of subsection 1 of § 21 of this Act, the conditions and limits for the rural municipality and city governments, agencies or agencies under the governance of administrative agencies, by which the budget amount specified in subsection 2 of this section may be exceeded.

(4) Upon implementation of the budget, adjustments arising from accounting principles may be recorded if they have a significant impact on implementation of the budget and were not planned in the budget.

(5) Within a budget section or between budget sections, implementation of the budget may differ from the planned budget by the same amount if, during the implementation of the budget, it becomes apparent that a transaction is classified differently than was prescribed in the budget.

§ 29. Preparation and approval of annual report

(1) Annual reports shall be prepared in accordance with the principles provided for in the Accounting Act, taking into account the specifications provided for in this Act.

(2) A rural municipality or city government shall prepare and approve an annual report. The annual report shall be signed and dated by the rural municipality or city mayor immediately after the rural municipality or city government has approved the report.

(3) In addition to the provisions of §§ 24 or 31 of the Accounting Act, the management report shall contain:

1) an overview of the fulfilment of the objectives prescribed in the development plan or other development documents of a local government during the accounting year. If indicators are applied, intended and actual information of the indicators shall be presented in the overview;

2) the value of operating result of the preceding five accounting years pursuant to subsection 1 of § 33 of this Act;

3) net debt of the preceding five accounting years pursuant to subsection 1 of § 34 of this Act;

4) reasons for failure to comply with the permitted value of the operating result specified in subsection 2 of § 33 of this Act or the upper limit on net debt specified in subsections 3–5 of § 34 of this Act if such failure has occurred;

5) an overview of activities planned for the application of measures for ensuring financial discipline planned in the budget strategy or the implementation of the recovery plan during the procedure specified in §§ 40 and 44 of this Act;

6) an overview of the implementation of internal audit systems.

(4) The report on the implementation of the budget which is a part of the annual accounts shall contain according to the classification specified in subsection 3 of § 5 of this Act at least the following:

1) initial budget of the accounting year;

2) final budget of the accounting year;

3) information on the implementation of the budget of the accounting year.

(4¹) The report on the implementation of the budget is prepared for a local government.

(5) An initial budget is the budget of an accounting year adopted pursuant to subsection 2 of § 23 of this Act.

(6) A final budget is the initial budget together with the amendments arising from supplementary budgets, clause 4 of subsection 4 of § 26 of this Act and the decision to use the reserve.

(7) It is not compulsory to present comparable figures concerning the financial year preceding the accounting year in the report on the implementation of the budget.

(8) An annex to the annual accounts shall be prepared concerning the report on the implementation of the budget which shall contain:

1) explanations and justification regarding the significant differences between the initial budget and the final budget;

2) explanations and justification regarding the significant differences between the final budget and the implementation of the budget;

3) a comparison between the figures with corresponding titles presented in the report on the implementation of the budget and other main statements of the annual accounts, including explanations and justification, if they have a significant impact on the implementation of the budget.

(9) Within the meaning of the Accounting Act and legislation established on the basis thereof, companies, foundations and non-profit organisations under dominant or significant influence of a local government shall submit to the rural municipality or city government within four months after the end of the financial year the approved annual report and the sworn auditor's report if auditing of the annual accounts is compulsory on the basis of the Auditors Activities Act.

(10) Before the approval of the annual report by the council, the revision committee reviews the annual report submitted to the council and hears the auditor who audited the report and who explains the contents of the most significant audit findings and irregularities detected in the course of the audit. Based on the findings of the auditor regarding the annual report and any irregularities detected, the revision committee may make proposals to the council in the report specified in subsection 7 of § 48 of the Local Government Organisation Act for improving the internal audit system of the rural municipality or city government.

(11) A rural municipality or city government shall submit the approved and signed annual report to the council for approval not later than by 31 May. The sworn auditor's report and decision of the rural municipality or city government on the approval of the report shall be appended to the annual report. The council shall approve the annual report by a resolution not later than by 30 June.

(12) The annual report, the sworn auditor’s report, the officially recorded decision of the rural municipality or city government on the approval of the report and the decision of the council on the approval of the report are published after their approval on the website of the local government.

(13) An audit of the annual accounts of a local government shall be conducted in accordance with the Auditors Activities Act and the sworn auditor’s report shall be prepared in the format established for the reports of public-interest entities.

§ 30. Budget and budget strategy submitted to state

(1) A local government submits to the Ministry of Regional Affairs and Agriculture the budget by functions and the budget strategy.

(2) The conditions of, procedure and format for submitting the documents specified in subsection 1 of this section shall be established by a regulation of the minister in charge of the policy sector.

(3) A local government submits to the Ministry of Regional Affairs and Agriculture information on:

1) the budget strategy by 15 December;

2) the budget by the last date of the month following each quarter.

§ 31. Other information on financial activities

(1) In justified cases, state agencies have the right to receive information from local governments which is not included in the annual report, budget or budget strategy, or reports established on the basis of subsection 2 of § 35 of the Accounting Act, official statistics, national registers or databases and other information. If such information is requested for all local governments, the state agency informs the national local government association thereof. These requirements do not apply to the National Audit Office, whose audit activities are based on the National Audit Office Act.

(1¹) The Ministry of Regional Affairs and Agriculture has the right to obtain copies of contracts entered into for the assumption of the debt obligations specified in subsections 2 and 7 of § 34 of this Act from a local government.

(2) A local government shall notify the Ministry of Finance of entry into service concession agreements by submitting information on the content, duration, financial terms and conditions, and financial volume of the project. The information shall be submitted within 30 working days from entry into the agreement. The Ministry of Finance has the right to demand the submission of the agreements concerning the above projects and other documents related thereto.

§ 32. Measures for ensuring financial discipline

(1) Measures for ensuring financial discipline of a local government include compliance with:

1) the permitted value of the operating result of a local government and local government financial management unit for the purposes of § 33 of this Act;

2) the upper limit on net debt of a local government and local government financial management unit for the purposes of § 34 of this Act.

(2) The value of the operating result and net debt are calculated on the basis of accounting information:

1) regarding a local government as at the end of the accounting year;

2) regarding a local government financial management unit in consolidated form as at the end of the accounting year;

(3) Consolidation shall be carried out in accordance with subsection 4 of § 27 of the Accounting Act.

(4) Specific calculation methods for the figures specified in subsection 1 of § 33 and subsection 1 of § 34 of this Act shall be established by a regulation of the minister in charge of the policy sector.

§ 33. Permitted value of operating result

(1) Operating result is the difference between operating revenue and operating expenditure.

(2) The value of operating result as at the end of an accounting year shall not be lower than zero.

(3) The operating result as at the end of an accounting year may be lower than the permitted value determined in subsection 2 of this section if the operating result of the preceding year corresponded to the permitted value determined in subsection 2 of this section.

§ 34. Upper limit on net debt

(1) Net debt is the difference between the amount of the debt obligations specified in subsection 2 of this section and the total amount of the liquid assets specified in § 36 of this Act.

(2) The following obligations recorded in the balance sheet are taken into account upon calculating net debt:

1) loans taken;

2) finance lease and factoring obligations;

3) bonds issued;

4) obligations not performed within the term;

5) obligations to repay received support;

5¹) advance payments received for support;

5²) obligations to grant support;

6) long-term debts to suppliers;

7) obligations arising from service concession agreements;

8) other long-term obligations requiring future payments.

(3) At the end of an accounting year, the net debt may amount to an eightfold difference between the operating revenue and operating expenditure of the accounting year ended but may not exceed the total amount of the operating revenue of the same accounting year.

(4) If the eightfold difference between the operating revenue and operating expenditure calculated on the basis of subsection 3 of this section is less than 70 per cent of the operating revenue of the corresponding accounting year, the net debt may amount to up to 70 per cent of the operating revenue of the corresponding accounting year.

(5) Net debt may exceed the upper limit on net debt established by subsections 3 and 4 of this section by the total amount of debt obligations assumed to provide bridge financing for support.

(6) For the purposes of this Act, bridge financing means the assumption of debt obligations to the extent of targeted financing and received co-financing related thereto in order to make payments within the framework of the respective project until the receipt of targeted financing and co-financing.

(7) In addition to the on-balance sheet debt obligations specified in subsection 2 of this section, lease obligations of the following periods arising from non-cancellable operational leasing contracts with a non-cancellable period of more than one year recorded in off-balance sheet items shall be taken into account in the net debt.

(8) Upon calculation of the difference between the operating revenue and operating expenditure specified in subsections 3 and 4 of this section, leasing costs arising from contracts specified in subsection 7 of this section shall be deducted from the operating expenditure of the accounting year.

§ 34¹. Taking account of application of measures for ensuring financial discipline upon granting investment support

(1) In order to receive investment support from the state budget on the conditions provided for in subsection 5 of § 50 of the State Budget Act, a local government and local government financial management unit shall comply with the following requirements:

1) the operating result of the year preceding the year of submission of the application shall correspond to the permitted value specified in subsection 2 of § 33 of this Act, except in the case specified in clause 2 of this subsection;

2) the operating result prescribed in the budget of the year of submission of the application shall correspond to the permitted value specified in subsection 2 of § 33 of this Act if the operating result of the year preceding the year of submission of the application complied with the provisions of subsection 3 of § 33 of this Act;

3) net debt shall not, according to the latest known data and the approved budget of the year of submission of the application, exceed as at the end of the year the upper limit provided for in subsections 3–5 of § 34 of this Act;

4) the upper limit on net debt provided for in subsections 3–5 of § 34 of this Act shall not be exceeded by a debt obligation assumed to cover self-financing of a project.

(2) If the local government applying for support has not planned to cover the self-financing of an investment in its budget or budget strategy, the provider of support may require a financial plan in which the local government shows how it will cover the self-financing.

(4) If the applicant for support is a local government or a unit dependent thereon or they contribute to self-financing of the project of another applicant and the requirements specified in subsections 1 and 2 of this section are not complied with, the provider of support excludes the project from the investment plan or denies the application, except in the case specified in subsection 5 of this section.

(5) If during the processing of the application the requirements specified in subsections 1 and 2 of this Act are not complied with but it is possible to implement the project in the current year or coming years, the provider of support may decide to satisfy the application by a secondary condition. The decision specifies a date by which the requirements provided in subsections 1 and 2 of this section must be complied with.

(6) Upon setting a secondary condition for compliance with the requirements provided for in subsections 1 and 2 of this section, the provider of support is required to ask the opinion of the Ministry of Regional Affairs and Agriculture before making the decision on the application.

(7) The requirements provided for in subsection 1 of this section shall not apply to health care providers for the purposes of the Health Care Services Organisation Act.

§ 36. Liquid assets

(1) For the purposes of this Act, liquid assets shall mean cash and funds on bank accounts, shares and units of money market and interest funds, and acquired bonds.

(1¹) A local government may own cash but not exceeding the upper limit on the amount kept in cash established by the rural municipality or city government.

(1²) A local government and a unit dependent thereon may own a deposit for everyday settlements:

1) in a credit institution which has no credit rating or the credit rating of which is lower than the investment grade credit rating according to the evaluation of internationally recognised rating agencies on the conditions determined in subsection 1³ of this section;

2) in a credit institution or a foreign credit institution acting as a parent undertaking or a branch thereof which has an investment grade credit rating.

(1³) The balance of the deposits placed in a credit institution specified in clause 1 of subsection 1² of this section shall not as at the end of the month be more than 0.5 per cent of the total amount of the operating revenue of the budget of the local government or the previous accounting year of the unit dependent thereon.

(2) A local government and a unit dependent thereon may invest funds determined as liquid assets in subsection 1 of this section in:

1) deposits in credit institutions maturing in one year if the credit rating of the credit institution or a foreign credit institution acting as a parent undertaking or a branch thereof according to the evaluation of internationally recognised rating agencies (hereinafter credit rating) is not lower than P-1 (Moody ’s) or its equivalent;

2) bonds the credit rating of the issuer of which is not lower than A2 (Moody ’s) or P-1 (Moody ’s) or their equivalent;

3) shares and units of money market and interest funds which comply with the requirements provided for in the Investment Funds Act concerning UCITS-s.

(2¹) If the highest credit rating of the issuer of the bond has become lower than the credit rating specified in clause 2 of subsection 2 of this section after the acquisition of the bond or the money market and interest fund does not comply with the requirements specified in clause 3 of subsection 2 of this section after the acquisition of the units, the local government and the unit dependent thereon shall realise the bond or transfer the unit within three months.

(3) A credit institution or a foreign credit institution acting as a parent undertaking or a branch thereof who is the issuer of the securities or depositary of the deposits specified in clauses 1 and 2 of subsection 2 of this section must be established in the contract state of the European Economic Area or the prudential ratios applicable to such institution must comply with the requirements which are at least as strict as those established by the legislation of the European Union.

(4) A local government may invest and use liquid assets in accordance with the conditions and procedure established on the basis of § 36¹ of this Act.

(5) The council may authorise the rural municipality or city government to establish, by a regulation, the conditions and procedure for the investment and use of liquid assets.

§ 36¹. Conditions and procedure for financial management

The conditions and procedure for the financial management of a local government are established by a regulation of the council.

§ 37. Requirements for other assets

(1) A local government may not acquire shares and other equity instruments and securities which are not considered liquid assets in accordance with § 36 of this Act except in the case specified in subsection 2 of § 35 of the Local Government Organisation Act.

(2) A local government may, in accordance with the budget strategy, grant a loan for investments only to a unit which has been dependent thereon in the last three years and which is dependant thereon in the budgetary year and secure the obligations assumed by the dependent unit for the same purpose.

(2¹) A local government may grant a loan for the purpose of managing cash flows to a unit which has been dependent thereon in the last three years and which is dependant thereon in the budgetary year provided that the loan shall be repaid by the end of the budgetary year. The council may decide on the grant of a loan separately for each individual case or establish a limit for the total amount of granted loans for the rural municipality or city government for the budgetary year.

(2²) A local government may secure the obligations of a person who is engaged in relending to local governments assumed for the same purpose on the following conditions:

1) relending is the principal activity of the person;

2) the person is founded jointly by at least three local governments and all the shares of the person operating as a company are held by at least three local governments.

(2³) The council may decide on the granting or securing of loans specified in subsection 2 of this section and on the granting of loans for the purpose of cash flow management on a case-by-case basis, or establish a limit for the total amount of loans granted for the rural municipality or city government for the budgetary year.

(3) A local government may, in order to secure its debt obligation or a debt obligation of a unit dependent thereon and in accordance with the budget strategy, encumber an immovable which is important for the performance of the functions of the local government or permit the right of superficies encumbering the immovable to be transferred or the immovable to be encumbered with limited real rights in such a manner that upon the transfer or encumbrance of the immovable or right of superficies, the immovable will continue to be used for the same purpose.

(4) The council may decide to encumber immovable property with a real right to secure the debt obligations specified in subsection 3 of this section on a case-by-case basis, or establish the conditions and procedure for encumbering immovable property in a regulation issued on the basis of § 36¹ of this Act.

§ 38. Requirements for assumption of obligations

(1) A local government may take loans, issue bonds, assume finance lease and factoring obligations and obligations on the basis of service concession agreements for:

1) investments;

2) targeted financing granted for acquisition of fixed assets;

3) acquisition of holdings, shares and other equity instruments;

4) refinancing of the assumed debt obligations;

5) granting the loans specified in subsection 2 of § 37 of this Act.

(2) During the procedure for eliminating the risk of a difficult financial situation, a local government may, in accordance with the recovery plan and financial plan, take a loan for the performance of the obligations specified in clause 4 of subsection 2 of § 34 of this Act.

(3) If a local government does not have sufficient funds for the performance of obligations arising from a court judgment, the local government may take a loan with the approval of the Ministry of Regional Affairs and Agriculture. In order to obtain approval, the local government shall submit to the Ministry of Regional Affairs and Agriculture a written application for approval for taking a loan explaining the reasons for taking a loan. The Ministry of Regional Affairs and Agriculture shall make a decision to grant or refuse to grant an approval for taking a loan on the basis of the right of discretion, taking into account the possibility to use the funds of the local government for the performance of obligations arising from a court judgment and other possibilities for the performance of the obligations.

(4) A local government may take a loan for the purpose of managing cash flows on the condition that the loan will be repaid by the end of the budgetary year.

(5) The council may decide on the assumption of debt obligations specified in clauses 1–3, 7 and 8 of subsection 2 of § 34 of this Act, assumption of lease obligations specified in subsection 7 of § 34, and assumption of loans for the purpose of cash flow management specified in subsection 4 of § 38 on a case-by-case basis, or establish limits for the total amount of debt obligations for the rural municipality or city government for the budgetary year.

§ 39. Failure to apply measures for ensuring financial discipline

(1) A local government or local government financial management unit shall not implement the measures for ensuring financial discipline if

1) the operating result as at the end of the accounting year was lower than the permitted value specified in subsection 2 of § 33 of this Act; or

2) the net debt as at the end of the accounting year exceeded the upper limit on net debt provided for in subsections 3–5 of § 34 of this Act.

(2) If the non-implementation of the measures for ensuring financial discipline specified in subsection 1 of this section occurred for the first time as at the end of the accounting year and the local government plans to continue the non-implementation by the adopted budget, the Ministry of Regional Affairs and Agriculture shall inform the local government of the consequences of non-implementation of the measures.

(3) The application of measures for ensuring financial discipline shall be verified on the basis of the figures presented in the annual report as at the date of approval of the corresponding annual report by the council.

§ 40. Procedure for application of measures for ensuring financial discipline

(1) The procedure for application of measures for ensuring financial discipline (hereinafter adjustment procedure) shall be initiated if it is established on the basis of subsection 3 of § 39 of this Act that:

1) the operating result of a local government or local government financial management unit as at the end of two consecutive accounting years was lower than the permitted value specified in subsection 2 of § 33 of this Act or

2) the net debt of a local government or local government financial management unit as at the end of two consecutive accounting years exceeded the upper limit on net debt provided for in subsections 3–5 of § 34 of this Act.

(2) The period of the adjustment procedure shall be the year in which any of the circumstances specified in subsection 1 of this section occur and the four subsequent years.

(3) Upon initiating the adjustment procedure, the local government shall ensure the application of measures for ensuring financial discipline prescribed by the budget strategy at the latest by the end of the procedure period. If the application thereof requires increasing of income or reducing of expenses, the local government shall present in the budget strategy corresponding adjustment activities together with the financial impact during the years of the adjustment procedure. During the procedure period, the budget strategy shall not prescribe activities which hinder the application of measures for ensuring financial discipline.

(4) During the adjustment procedure, the local government may not plan the budget in such a manner that as at the end of the year the operating result is lower than or the net debt exceeds the amount planned in the budget strategy for the corresponding year of the adjustment procedure.

(5) During the procedure period, a health care provider may increase its net debt up to 60 per cent of the amount of operating revenue, if necessary, if the compliance with the conditions provided for in subsection 3 of this section is ensured.

(6) If the budget strategy or budget does not comply with the conditions specified in subsections 3 and 4 of this section, the Ministry of Regional Affairs and Agriculture shall submit to the local government a reasoned proposal to bring the budget strategy and budget into conformity with the requirements of the Act within 60 days from the receipt of the proposal.

(7) Subsection 1 of this section shall not apply during the adjustment procedure and the procedure for eliminating the risk of a difficult financial situation.

§ 41. Termination of adjustment procedure

The adjustment procedure shall be deemed to be terminated:

1) as at the date of approval of the annual report, if the local government and local government financial management unit apply measures for ensuring financial discipline as at the end of the accounting year;

2) as at the date of the decision to initiate of the procedure for eliminating the risk of a difficult financial situation specified in subsection 3 of § 44 of this Act or

3) as at the end of the year of entry into force of the alteration of administrative-territorial organisation.

§ 42. Risk of difficult financial situation

(1) A local government is in risk of a difficult financial situation if:

1) the council of the local government has not approved a budget strategy which complies with subsection 3 of § 40 of this Act by the term provided for in subsection 6 of § 40 of this Act;

2) the local government or local government financial management unit does not apply measures for ensuring financial discipline according to the annual report approved as at the end of the last accounting year of the period of the adjustment procedure specified in subsection 2 of § 40 of this Act;

3) the local government is permanently incapable of performing assumed obligations and satisfying the claims of creditors within the term.

(2) If a local government or local government financial management unit fails to apply measures for ensuring financial discipline, the local government may submit an application to the Ministry of Regional Affairs and Agriculture to initiate the procedure for eliminating the risk of a difficult financial situation.

(3) If a local government and local government financial management unit apply measures for ensuring financial discipline but the local government is permanently incapable of performing the assumed obligations, the local government may submit an application to the Ministry of Regional Affairs and Agriculture to initiate the process for eliminating the risk of a difficult financial situation.

(4) Reasons for the emergence of the risk of a difficult financial situation shall be given in the application specified in subsections 2 and 3 of this section. A local government shall submit together with the application a draft recovery plan and draft financial plan prepared pursuant to subsections 4 and 6 of § 47 of this Act.

§ 43. Committee on risk of difficult financial situation

(1) A committee on risk of difficult financial situation (hereinafter committee) shall advise the Ministry of Regional Affairs and Agriculture upon conducting the procedure for eliminating the risk of a difficult financial situation of a local government with the aim to eliminate the risk of a difficult financial situation and treat the creditors equally.

(2) The minister in charge of the policy sector shall form the committee and approve the rules of procedure thereof.

(3) The committee is formed as a standing committee and the members of the committee are three officials of the Ministry of Regional Affairs and Agriculture and two persons appointed by national association of local authorities. The chairman of the committee is an official of the Ministry of Regional Affairs and Agriculture. The committee may engage experts in its work.

(4) Members of the committee shall be independent of the local government in risk of a difficult financial situation and the unit dependent thereon.

(5) The Ministry of Regional Affairs and Agriculture shall ensure support to the work of the committee.

(6) The committee shall make decisions at a meeting of the committee by voting in writing or electronically. All members of the committee participating in a meeting shall be obliged to vote and shall not remain undecided. Decisions of the committee shall be published on the website of the Ministry of Regional Affairs and Agriculture.

(7) A member of the committee shall not participate in the making of decisions and shall remove himself or herself if any circumstances exist which give reason to doubt his or her impartiality.

§ 44. Initiation of procedure for eliminating risk of difficult financial situation

(1) If circumstances specified in clauses 1 and 2 of subsection 1 of § 42 of this Act become evident, the Ministry of Regional Affairs and Agriculture shall decide on the initiation of the procedure for eliminating the risk of a difficult financial situation with regard to the local government concerned and inform the committee thereof.

(2) If a local government has submitted the application specified in subsections 2 or 3 of § 42 of this Act, the Ministry of Regional Affairs and Agriculture shall analyse the submitted draft recovery plan and draft financial plan. If the initiation of the procedure for eliminating the risk of a difficult financial situation is reasoned, the Ministry of Regional Affairs and Agriculture shall forward the application and the draft recovery plan and draft financial plan to the committee together with its position within 20 working days from the receipt thereof.

(2¹) If, as a result of an analysis, the Ministry of Regional Affairs and Agriculture finds that the local government is able to independently satisfy the claims of the creditors and apply the measures for ensuring financial discipline, the Ministry of Regional Affairs and Agriculture shall inform the local government within 20 working days from the receipt of the application that it shall not support the initiation of the procedure for eliminating the risk of a difficult financial situation, and shall add explanations.

(2²) If a local government disagrees with the position which does not support the initiation of the procedure, the local government may submit a new application and draft recovery plan and draft financial plan to the Ministry of Regional Affairs and Agriculture. The Ministry of Regional Affairs and Agriculture shall submit these to the committee together with its position within 20 working days from the receipt thereof.

(3) The procedure for eliminating the risk of a difficult financial situation shall commence after making of the corresponding decision by the Ministry of Regional Affairs and Agriculture and is terminated after making of the decision specified in subsections 2 and 3 of § 52 of this Act.

(5) In connection with the initiation of the procedure for eliminating the risk of a difficult financial situation, the council submits draft legislation related to the activities specified in clauses 1–6, 7, 8, 19, 21, 22, 24, 25, 34, 35 and 36 of subsection 1 of § 22 of the Local Government Organisation Act for approval to the Ministry of Regional Affairs and Agriculture until a recovery plan is approved.

(6) For the approval of draft legislation specified in subsection 5 of this section, the council of a local government shall submit draft legislation together with an explanatory note to the Ministry of Regional Affairs and Agriculture.

(7) The Ministry of Regional Affairs and Agriculture shall refuse to approve draft legislation if the approval thereof would decrease the income of the local government and the unit dependent thereon, increase their expenses, decrease the amount of assets or increase the amount of obligations in comparison to the adopted budget. In the event of refusal to approve draft legislation, the Ministry of Regional Affairs and Agriculture shall present justification therefor.

(8) A local government shall appoint an authorised person who shall participate in the work of the committee without the right to vote within ten working days from the declaration of the risk of a difficult financial situation.

(9) The Ministry of Regional Affairs and Agriculture has the right to request additional information for specifying the information presented in the application and draft recovery plan and draft financial plan, and for analysing the financial situation of the local government.

§ 45. Terms prescribed for Ministry of Regional Affairs and Agriculture concerning procedure for eliminating risk of difficult financial situation

(1) The Ministry of Regional Affairs and Agriculture shall decide within ten working days from the receipt of a draft or proposal the approval or refusal to grant the approval specified in subsection 5 of § 44 and subsection 2 of § 49 of this Act.

(3) The Ministry of Regional Affairs and Agriculture shall decide within 30 working days from the receipt of an application or draft plan:

1) the initiation of the procedure for eliminating the risk of a difficult financial situation or refusal to satisfy the corresponding application;

2) the provision of an opinion on the draft recovery plan and draft financial plan;

3) the termination of the procedure for eliminating the risk of a difficult financial situation or refusal to satisfy the application for termination.

(4) If the Ministry of Regional Affairs and Agriculture has requested additional information from a local government on the basis of subsection 9 of § 44 of this Act, calculation of the terms specified in subsections 1 and 3 of this section shall be suspended until submission of the information requested from the local government.

§ 46. Terms prescribed for local government concerning procedure for eliminating risk of difficult financial situation

(1) A local government shall present a draft recovery plan and draft financial plan to the Ministry of Regional Affairs and Agriculture for approval within 60 days from:

1) the receipt of the decision to initiate the procedure for eliminating the risk of a difficult financial situation if the procedure has been initiated on the basis of subsection 1 of § 44 of this Act;

2) the receipt of the decision to refuse to satisfy the application for termination of the procedure for eliminating the risk of a difficult financial situation.

(1¹) A local government is required to eliminate the deficiencies in the application and the draft recovery plan and draft financial plan within 20 working days from the receipt of a respective demand from the Ministry of Regional Affairs and Agriculture.

(2) A local government council shall approve the recovery plan and financial plan and the amendments thereto within 30 days from the receipt of the opinion on and proposed amendments to the draft plans or the approval of proposed amendments from the Ministry of Regional Affairs and Agriculture.

(3) A local government shall bring all legislation related to the fulfilment of the objectives indicated in the recovery plan into conformity with the recovery plan within 60 days from the acceptance of the recovery plan.

(4) A local government shall submit the approved recovery plan and financial plan and the amendments thereto to the Ministry of Regional Affairs and Agriculture within ten working days from the approval thereof.

(5) A local government publishes the approved recovery plan and financial plan and the amendments thereto on the website of the local government.

§ 47. Recovery plan

(1) As a result of the implementation of the recovery plan, a local government shall be able to satisfy the claims of the creditors pursuant to the conditions of the recovery plan and the local government and local government financial management unit shall apply measures for ensuring financial discipline.

(2) The period of validity of the recovery plan and financial plan shall be the year of the preparation thereof and the four subsequent budgetary years.

(3) If the Ministry of Regional Affairs and Agriculture finds that the measures for ensuring financial discipline can be applied and the claims of the creditors can be satisfied earlier than after four coming budgetary years, the Ministry of Regional Affairs and Agriculture may determine in the draft recovery plan and draft financial plan a shorter period for the implementation thereof.

(4) A recovery plan shall be prepared regarding a local government and shall include:

1) an opinion on the reasons for the emergence of the risk of a difficult financial situation;

4) measures for increasing income and decreasing expenses;

5) restrictions on and conditions for investment activities and assumption of obligations;

6) conditions for performance of obligations and satisfaction of claims by an agreement with the creditors;

7) conditions for the situation when income exceeds the amount forecasted in the financial plan;

8) proposals for the organisation of management and reorganisation of administrative agencies and agencies under the governance of administrative agencies and reduction of the composition of their staff of public servants, if necessary;

9) proposals for amending the legislation of the local government, if necessary;

10) the obligation to obtain an approval of the Ministry of Regional Affairs and Agriculture regarding draft budgets or draft supplementary budgets submitted to the council during the period of validity of the recovery plan, if necessary;

11) other information and proposals necessary for recovery.

(5) A financial plan is a part of the recovery plan. Budget sections of a local government shall be planned in the financial plan for the period of implementation of the recovery plan.

(6) A financial plan shall be prepared by budget sections which are classified, in addition to the classification prescribed by subsection 3 of § 5 of this Act, at least to the detail of the class of account prescribed by the general rules for state accounting established on the basis of subsection 2 of § 35 of the Accounting Act or, in the absence thereof, to the smallest detail preceding the precision of the class of account at least by areas of activity.

(7) The following regarding a local government and local government financial management unit shall be presented in the financial plan as at the end of each year for the period of validity of the recovery plan:

1) forecasted operating result according to subsection 1 of § 33 of this Act;

2) forecasted value of operating result according to subsection 2 of § 33 of this Act;

3) forecasted net debt according to subsection 1 of § 34 of this Act;

4) forecasted compliance of net debt with the upper limit according to subsections 3–5 of § 34 of this Act.

(7¹) If the Government of the Republic has decided to grant support or a loan from the state budget pursuant to clause 1 of subsection 1 of § 50 of this Act, the corresponding amount shall be prescribed by the financial plan and the conditions for using the amount by the recovery plan.

(8) If a procedure for eliminating the risk of a difficult financial situation has been initiated because the local government financial management unit does not apply measures for ensuring financial discipline due to the activities of a dependent unit, then:

1) the recovery plan may prescribe instructions for directing the financial activities of the dependent units, if necessary;

2) the forecasted operating revenue, operating expenditure, investment activities, financing activities and changes in liquid assets, forecasted surplus or deficit and net debt for the year of preparation of the recovery plan and every coming four budgetary years concerning the dependent units shall be presented in the financial plan.

(9) A recovery plan and financial plan may be prepared in such a manner that a health care provider, within the meaning of the Health Services Organisation Act, may with the approval of the Ministry of Regional Affairs and Agriculture increase its net debt up to 60 per cent of the amount of operating revenue, if necessary, if the compliance with the conditions specified in subsection 1 of this section is ensured.

§ 48. Preparation and approval of recovery plan

(1) A local government in risk of a difficult financial situation shall prepare a draft recovery plan and a draft financial plan in accordance with § 47 of this Act and submit them to the Ministry of Regional Affairs and Agriculture.

(2) If in the opinion of the Ministry of Regional Affairs and Agriculture the local government is unable to escape from the risk of a difficult financial situation upon the implementation of the draft recovery plan or the draft financial plan, the Ministry of Regional Affairs and Agriculture may submit proposals for amending the draft recovery plan and the draft financial plan. The Ministry of Regional Affairs and Agriculture may decide on the addition of information specified in clauses 8–11 of subsection 4 of § 47 and subsection 8 of § 47 of this Act to the draft recovery plan. The Ministry of Regional Affairs and Agriculture shall provide an opinion on the draft recovery plan and the draft financial plan and, if necessary, propose amendments together with justification to the council for approval.

(3) The recovery plan and financial plan approved by the council shall constitute the basis for the preparation and amendment of the development plan and budget strategy, preparation of the supplementary budget, if the preparation of a supplementary budget is necessary for the implementation of the recovery plan and the financial plan, and the preparation of draft budgets for the coming years. Upon preparation of the draft budget, the classification of the financial plan shall be observed.

(4) The budget strategy and the draft budget shall provide all differences compared to the recovery plan and financial plan, and justification thereof.

§ 49. Amendment of recovery plan and budget

(1) If the Ministry of Regional Affairs and Agriculture is aware of circumstances which may hinder the implementation of the recovery plan and the financial plan, the Ministry of Regional Affairs and Agriculture shall inform the local government.

(2) The council has the right to initiate the amendment of the recovery plan or financial plan and, as a result of amending the financial plan, adopt the budget or supplementary budget. The local government shall submit the proposal for amending the recovery plan and financial plan to the Ministry of Regional Affairs and Agriculture for approval. In order to plan expenses on the condition specified in subsection 3 of this section it is not necessary to apply for the approval of the Ministry of Regional Affairs and Agriculture.

(3) In every budgetary year during the period of implementation of the recovery plan, the local government may plan amendments in the budget or supplementary budget compared to the financial plan if it does not result in decrease in surplus or increase in deficit. Upon increase in income, the provisions of clause 7 of subsection 4 of § 47 of this Act shall be applied. In other cases, amendments may be planned in every budget section during the budgetary year to the extent of up to 10 per cent of the total annual amount of the corresponding budget section presented in the financial plan.

(4) The Ministry of Regional Affairs and Agriculture shall submit relevant justification upon refusal to approve the proposal specified in subsection 2 of this section. The Ministry of Regional Affairs and Agriculture may refuse to approve the proposal if the amendment of the recovery plan or financial plan or the adoption of the supplementary budget would aggravate the financial situation of the local government or local government financial management unit and hinder the fulfilment of objectives and activities prescribed by the recovery plan.

§ 50. Failure to implement recovery plan

(1) If in the opinion of the Ministry of Regional Affairs and Agriculture a local government is unable to comply with the recovery plan, the Government of the Republic shall have the right to apply one or both of the following measures at the request of the minister in charge of the policy sector:

1) to decide on the grant of support or loan from the state budget according to the State Budget Act;

2) to initiate the alteration of administrative-territorial organisation according to the Territory of Estonia Administrative Division Act.

(2) Upon the grant of support from the state budget in the case specified clause 1 of subsection 1 of this section, the minister in charge of the policy sector shall enter into a contract with the local government. The minister in charge of the policy sector has the right to prescribe in the contract the requirement to pay contractual penalty or return the support upon breach of contract.

§ 51. Supervision of procedure for eliminating risk of difficult financial situation

(1) The Ministry of Regional Affairs and Agriculture shall exercise supervision over the activities of a local government in the risk of a difficult financial situation as of the declaration of the procedure for eliminating the risk of a difficult financial situation, involving other agencies and persons in performing the supervisory operations, if necessary.

(2) A local government in risk of a difficult financial situation is required to submit information and documents regarding the local government or the dependant unit, including accounting records and copies of the contracts entered into, to the Ministry of Regional Affairs and Agriculture at the request thereof.

(3) The Ministry of Regional Affairs and Agriculture has the right to receive information and documents from state agencies, local government agencies, credit and financial institutions, and other persons necessary for determining the financial status of a local government and dependent unit and monitoring the implementation of the recovery plan.

(4) If it becomes evident in the course of supervision proceedings that a local government has committed the violation specified in § 57 of this Act, the Ministry of Regional Affairs and Agriculture has the right to issue a precept for bringing the activities of the local government into conformity with this Act, the recovery plan and financial plan and to set a term for the elimination of the violation.

§ 52. Termination of procedure for eliminating risk of difficult financial situation

(1) A local government may apply to the Ministry of Regional Affairs and Agriculture for the termination of the period of implementation of the recovery plan and the procedure for eliminating the risk of a difficult financial situation after the approval of the annual report if as at the end of an accounting year:

1) the local government is able to satisfy the claims of the creditors under the conditions prescribed by the recovery plan;

2) the local government and local government financial management unit implement the measures for ensuring financial discipline.

(2) Upon compliance with the conditions and fulfilment of the objectives prescribed by the recovery plan specified in subsection 1 of this section, the Ministry of Regional Affairs and Agriculture shall decide on the termination of the procedure for eliminating the risk of a difficult financial situation.

(3) The Ministry of Regional Affairs and Agriculture shall decide on the termination of the procedure for eliminating the risk of a difficult financial situation if:

1) circumstances specified in subsection 10 of § 14¹ of the Territory of Estonia Administrative Division Act become evident;

2) bankruptcy proceedings have been initiated with regard to the dependent unit on the basis of the Bankruptcy Act and the local government financial management unit shall apply financial discipline measures as a result of the removal of the dependent unit from the consolidation group.

(4) The Ministry of Regional Affairs and Agriculture shall refuse to satisfy the application specified in subsection 1 of this section if the local government fails to comply with at least one of the following conditions:

1) the local government has not been able to satisfy all the claims of the creditors under the conditions prescribed by the recovery plan;

2) the local government or local government financial management unit does not apply measures for ensuring financial discipline as at the end of the accounting year;

3) the local government has failed to perform the activities prescribed by the recovery plan and such failure may cause the risk of a difficult financial situation to re-emerge in the coming years.

(5) The Ministry of Regional Affairs and Agriculture shall decide together with the decision to refuse to satisfy the application whether:

1) to impose an obligation on the local government to continue the implementation of the approved recovery plan;

2) to impose an obligation on the local government to submit a draft recovery plan and draft financial plan for up to four following budgetary years prepared pursuant to § 47 of this Act by the term specified in subsection 1 of § 46 of this Act or

3) to submit a proposal for initiating the alteration of administrative-territorial organisation.

§ 53. Suspension of transfer of equalisation fund and income tax appropriations

(1) Upon the violations specified in § 54–56 of this Act, the Ministry of Regional Affairs and Agriculture shall issue a precept to the local government for the termination of the violation and set a term for the elimination of the violation.

(2) If the violation has not been terminated within the term prescribed by the precept specified in subsection 1 of this section or subsection 4 of § 51 of this Act, the minister in charge of the policy sector shall issue a directive suspending:

1) the transfer of appropriations from the equalisation fund provided for in clause 1 of subsection 1 of § 46 of the State Budget Act;

2) the transfer of amounts of income tax subject to transfer pursuant to the procedure for transferring income tax to local governments established on the basis of subsection 2 of § 5 of the Income Tax Act.

(3) The Ministry of Regional Affairs and Agriculture shall submit a draft directive to the local government and set a term for the provision of an opinion.

(4) The Ministry of Regional Affairs and Agriculture shall immediately inform the local government of suspending the transfer of the amounts of equalisation fund and income tax.

(5) Upon the violations specified in §§ 54, 56 and 57 of this Act, 10 per cent of the funds allocated from the budget equalisation fund to the local government on the basis of the annual State Budget Act and the amount of income tax calculated for the local government pursuant to the procedure for the transfer of income tax to local governments established on the basis of subsection 2 of § 5 of the Income Tax Act shall be withheld from the amounts subject to transfer from the equalisation fund and income tax during the budgetary year.

(6) Upon the violations specified in § 55 of this Act, the amount by which the violation was committed, but not more than 20 per cent of the funds allocated from the budget equalisation fund to the local government on the basis of the annual State Budget Act and the amount of income tax calculated for the local government pursuant to the procedure for the transfer of income tax to local governments established on the basis of subsection 2 of § 5 of the Income Tax Act, shall be withheld every budgetary year.

(7) The transfer of amounts subject to transfer from the budget equalisation fund and income tax may be suspended until the circumstances which caused the suspension cease to exist. The minister in charge of the policy sector shall approve the termination of withholding the amounts by a directive within five working days from establishing that the circumstances have ceased to exist. The Ministry of Regional Affairs and Agriculture shall inform the local government of terminating the suspension of transfer of the amounts immediately after making the decision and transfer the withheld amounts to the local government on the following regular date on which transfers are made.

§ 54. Violation of requirements for reports, terms for approval of reports and submission of information

The following circumstances are deemed to be violations of the requirements for reports, terms for approval of reports and submission of information:

1) a local government has failed to approve the annual report for the term specified in subsection 11 of § 29 of this Act;

2) a local government has failed to submit information specified in subsection 1 of § 30 of this Act within the term specified in subsections 3 and 4 of § 30 of this Act;

3) a local government has failed to submit the balance records for the term for submission of reports established on the basis of subsection 2 of § 35 of the Accounting Act;

4) the annual accounts of a local government do not comply with the Accounting Act.

§ 55. Violation of requirements for assets and obligations

The following circumstances are deemed to be violations of the requirements for assets and obligations:

1) a local government has failed to comply with the requirements established in subsection 1 of § 37 of this Act upon investment of assets;

2) a local government has failed to comply with the conditions established in subsections 1³, 2 and 2¹ of § 36 of this Act upon possession of liquid assets;

3) a local government has failed to comply with the conditions established in subsections 2 and 2¹ of § 37 of this Act upon grant of loans or securing obligations;

4) a local government has failed to comply with the conditions established in subsections 1–4 of § 38 of this Act upon assumption of obligations;

§ 57. Violation of procedure for eliminating risk of difficult financial situation

The following circumstances are deemed to be violations of the procedure for eliminating the risk of a difficult financial situation:

1) a local government fails to submit a draft recovery plan and draft financial plan to the Ministry of Regional Affairs and Agriculture within the term;

2) a local government approves legislation specified in subsection 5 of § 44 of this Act without the approval of the Ministry of Regional Affairs and Agriculture or disregards the refusal of the Ministry of Regional Affairs and Agriculture to approve the legislation upon passage of the legislation;

3) a local government shall approve a recovery plan and financial plan or amendments thereto without the approval of the Ministry of Regional Affairs and Agriculture or not corresponding to the amendments made or proposals submitted by the Ministry of Regional Affairs and Agriculture;

4) a local government disregards the recovery plan and financial plan upon adoption of the budget, supplementary budget or making of other decisions, except in the case specified in subsection 3 of § 49 of this Act;

5) a local government fails to submit an overview of the implementation of the recovery plan in the management report pursuant to clause 5 of subsection 3 of § 29 of this Act.

§ 58. Premature termination of authorities of council members upon violation of procedure for eliminating risk of difficult financial situation

Upon violation of subsection 2 of § 46 of this Act, the council shall be unable to act and the authority of every council member shall terminate prematurely. A new council shall be formed pursuant to the procedure provided by § 52 of the Local Government Organisation Act.

§ 59. Implementation of Act

(1) This Act shall be implemented with regard to the year 2012 and the following years, taking into account the specifications provided in this section.

(2) Budgets for the year 2011 shall be prepared, processed, adopted and published, and implemented and amended, expenses shall be carried forward to the following budgetary year, implementation of budgets shall be reported on and annual reports shall be prepared on the basis of the Rural Municipality and City Budgets Act and legislation established on the basis thereof.

(3) Section 20 of this Act shall be implemented as of 1 January 2012.

(4) Section 29 of this Act shall be implemented with regard to annual reports prepared for the year 2012 and the following years.

(4¹) The information specified in clauses 2 and 3 of subsection 3 of § 29 of this Act shall be submitted for the first time concerning the year 2012. Information of the last accounting year shall be added to the management report each year until five accounting years are covered.

(5) As of 1 January 2011, a local government may grant study loans only on the basis of study loan agreements entered into before the year 2011.

(6) The obligation to publish the minutes of council sessions and meetings of council committees specified in subsection 3 of § 23 of this Act shall be implemented with regard to budgets and supplementary budgets of the year 2012 and the following years.

(7) Sections 32–37 of this Act shall be implemented with regard to the year 2012 and the following years.

(7¹) A local government or local government financial management unit the net debt of which is 60 per cent of the operating revenue or more as at the beginning of an accounting year shall not increase the total amount of debt obligations by taking debt obligations specified in subsection 2 of § 34 of this Act or lease obligations specified in subsection 7 of § 34 from 1 January 2012 until 31 December 2016.

(7²) A local government or local government financial management unit the net debt of which is less than 60 per cent of the operating revenue as at the beginning of an accounting year shall not increase the net debt to the extent exceeding 60 per cent of the operating revenue of the same accounting year by taking debt obligations specified in subsection 2 of § 34 of this Act or lease obligations specified in subsection 7 of § 34 from 1 January 2012 until 31 December 2016.

(7³) During the period from 1 January 2011 until 31 December 2015, net debt my exceed the upper limit on net debt of that period established by subsections 3 and 4 of § 34 of this Act in order to comply with the requirements of the Council Directive concerning urban waste water treatment 91/271/EEC (OJ L 135, 30.5.1991, p. 40–52) and the Council Directive 98/83/EC on the quality of water intended for human consumption (OJ L 330, 5.12.1998, p. 32–54) by the total amount of debt obligations assumed to cover self-financing of the projects which are being implemented if the loan for such projects is granted by the person specified in subsection 1 of § 56 of the Environmental Charges Act from loan funds allocated to the person to the extent of up to ten million euros in total per year for local governments, and the remaining part from own funds without increasing the debt of the public sector.

(7⁴) The restrictions established in subsections 7¹ and 7² of this section shall not apply if a local government or local government financial management unit assumes debt obligations on the condition provided for in subsection 5 of § 34 of this Act or subsection 7³ of this section.

(7⁵) Violation by a local government or local government financial management unit of the conditions specified in subsections 7¹ and 7² of this section is deemed to be violation of the requirements for assets and obligations within the meaning of § 55 of this Act.

(8) Subsections 7 and 8 of § 34 of this Act shall be implemented with regard to transactions concluded after 1 January 2012.

(8¹) Section 55 of this Act shall be implemented with regard to obligations assumed and transactions concluded with assets after 1 January 2012.

(8²) Section 34¹ of this Act shall not apply to support granted on the basis of the 2007–2013 Structural Assistance Act.

(9) Clauses 4 and 10–19 of § 63 of this Act shall be implemented as of 1 January 2013.

(11) The wording of subsections 10 and 13 of § 29 of this Act which enter into force on 1 January 2019 shall apply to accounting periods starting on 1 January 2018 or later.

(15) In 2020, the city government or rural municipality government shall submit the draft budget and explanatory note to the council not later than by 15 December.

(16) In 2020, the local governments shall submit the data on the budget strategy to the Ministry of Finance not later than by 15 December.

(17) In 2020, the city government or rural municipality government may comply with the provisions of clause 2 of subsection 2 of § 22 of this Act only partially, providing their reasons in the explanatory note to the budget draft.

§ 60

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§ 66

[Omitted from this text.]

§ 67. Entry into force of Act

(1) This Act enters into force on 1 January 2011.

(2) [Omitted from this text.]